What was the Dotcom Crash? The 1990s was a decade marked by serious expansion in the United States. It was one of the best periods of growth the U.S. had ever seen. Irrational exuberance sent valuations of internet stocks soaring, leading to a wild bull market ride. Remember, what goes up must come down, and the dotcom crash of 2000 was forever seared in investors’ minds.
Table of Contents
Dotcom Crash Introduction
They’re deceptive, unpredictable, ruthless, and notoriously hard to recognize when you’re in one. If you’re not paying attention, stock market bubbles will sneak up on you and destroy your financial foundation.
They happen overnight; it’s too late to prepare when that day comes. And then you’re in a world of hurt. However, with Y2K, we had a lot of time to prepare. And while that wasn’t necessarily what caused the dotcom crash, it was around the same time.
Our computers were going to come alive and take over the world. So we all turned into regular old doomsday preppers. People were buying canned food and bottled water like it was going out of style. And bomb shelters were en vogue. Hence the lead-up to the stock market crash.
When the bubble explodes, there’s no more steam left in the system. In the 2008 financial crisis, 158-year-old Lehman Brothers failed almost overnight. The entire city blocks had boards on the windows. Stocks crashed 57% from their 2007 high.
It was a bloodbath, and the dotcom crash was no different. Crashes always seem to proceed with unprecedented economic growth. We’ve seen much growth, whether it’s the stock market crash in 1929 or the dotcom crash.
StocksToTrade Dotcom Bubble Chart
What Was the Dotcom Bubble?
The Internet was commercialized in 1995, creating a speculative bubble from 1997 to 2000. With a rapid rise in valuations of U.S. tech stocks, people wildly invested in companies with a “.com” domain on their internet address. This fueled the bull market in the late 1990s.
During this period, the value of equity markets grew exponentially. To put things into perspective, the technology-dominated Nasdaq index rose from 1,000 to more than 5,000 between 1995 and 2000.
Lead Up to the Dotcom Crash
On the surface, we can trade the dot-com bubble’s origins to the launch of the World Wide Web in 1989. With that came the establishment of Internet and tech-based start-up companies during the 1990s.
The period we have marked the emergence of the widespread use and adoption of the Internet for online shopping, communication, and as a news source.
What fueled the fire? Over the next five years, the bubble formed was fueled by cheap money, easy access to capital, investor overconfidence, and downright pure speculation.
During this time, the U.S federal government lowered the maximum tax rate on capital gains for individual investors from 28% to 20%
Wanton Investing
1997 ushered in an era in which record amounts of money poured into the Nasdaq. Two short years later, 39% of all venture capital investments were in Internet companies, along with most IPOs. By 1999, most of the 457 IPOs were tied to the tech sector.
To make matters worse, companies that hadn’t even turned a profit, let alone a finished product, went to market with IPO. And the worst part is many saw their stock prices so much as quadruple in one day. It was a feeding frenzy for investors.
At its peak was the AOL Time Warner megamerger in January of 2000, which became the biggest merger failure in history.
Towards the decade’s end, the momentum train rolled ahead at full speed. With speculation or fad-based investing at an all-time high and the seemingly endless availability of venture capital to fund start-ups, investors felt invisible. In a race to get big quickly, start-ups spent a fortune on marketing. In some cases, a mind-boggling 90% of their budget.
On the surface, pouring millions of dollars into internet start-ups seemed like the right thing to do until it wasn’t…
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What Caused the Dotcom Crash?
We can’t stress enough the importance of buying low and selling high at Bullish Bears. It is the foundation of a solid trading plan. And that is exactly what the leading high-tech companies like Dell and Cisco did at the market’s peak.
With huge sell orders placed on the market, many investors panicked and sold off their shares. Within only a few short weeks, the stock market lost 10% of its value.
Further to this, what do you think will happen to those companies with no track record of success and valuations that make no sense? How about companies with no business plan or even a product to deliver?
They crash and crash hard. As the capital began to dry up, so did the lifeblood of these so-called dotcom companies.
The future was bleak. Within months, dotcom companies with market capitalizations in the hundreds of millions became worthless overnight. Sadly yet predictably, trillions of dollars of investor’s money evaporated overnight.
Key Takeaways
- In the economic context, a bubble is when the price for something – a stock, financial asset class, or even the entire market is grossly overpriced compared to its fundamental value.
- The period from 1995-1997 was the warm-up to the dotcom bubble.
- Irrational exuberance in .com tech stocks sent valuations of internet stocks through the roof.
- The dotcom bubble lasted for about two years, from 1998-2000
- The bubble burst, ushering in a two-year-long bear market that saw the Nasdaq index fall 76.81%.
- It took the Nasdaq 15 years to regain its value.
- Companies that famously survived the dotcom crash were Amazon, eBay, and Priceline.
Final Thoughts: Dotcom Crash
By 2000, things worsened, seeing the Nasdaq value fall off a cliff. The bubble burst, ushering in a two-year-long bear market that saw the Nasdaq index fall 76.81%. From its peak of 5,048.62 on March 10th, 2000, the Nasdaq fell to a low of 1,139.90 on October 4th, 2002.
And the worst part was that pretty much no tech stocks were immune. Even blue-chip tech giants like Cisco, Intel, and Oracle lost over 80% of their value. To that end, the Nasdaq took over 15 years to regain its losses.
What caused the dotcom crash in such an epic fashion isn’t quite as easy to pin down. But I know for sure that the same factors that helped the dot-com bubble burst in 2000 are in play today.
